Pension funds that opt for a Paris Aligned Benchmark (PAB) risk losing sight of other important sustainability risks as PABs focus on climate risk only, according to Dennis van der Putten and Caspar Snijders, head of sustainability and head of equities at the Anglo-Dutch asset manager Cardano.


The PAB was introduced by the EU in 2019 to help investors align their portfolios with the Paris Agreement. The benchmark excludes companies that derive more than 1% of their revenues from coal, 10% from oil and/or 50% from natural gas extraction. Utilities that rely on fossil fuels for more than 50% of their revenue are also excluded. In addition, investors who choose this benchmark commit to reducing the CO2 emissions from their equity investments by 7% each year.

Pension funds that use such a benchmark for at least a share of their investments include the UK’s Brunel Pension Partnership, Sweden’s AP2 and Dutch pension funds ING and UWV.

The less strict cousin of the PAB is the Climate Transition Benchmark (CTB). According to this benchmark, there is still some room to invest in fossil fuels. Pension funds that invest according to the CTB are Pensioenfonds Ahold Delhaize and Pensioenfonds SNS Reaal.

One-dimensional focus

The PAB’s and CTB’s ‘one-dimensional focus’ on CO2 emissions means that investment strategies based on these benchmarks could quickly become outdated, Snijders and Van der Putten argue.

“Sustainability is currently more or less synonymous with CO2 reduction and exclusion of fossil energy. While the PAB and CTB are fully consistent with these principles, they merely reflect one aspect of ESG investing. As such, climate tunnel vision is lurking,” the pair writes in a recently published paper.

If the EU green taxonomy were to be expanded to include a social taxonomy, for example, this would not be included in the PAB, Snijders told IPE. The same goes for other green themes such as biodiversity and deforestation, he added.

Snijders said: “If you want to include these kinds of things in a few years’ time, you would have to adjust your investment policy again, with all the associated costs,”  notes.

Grey benchmark

While a climate benchmark must meet certain criteria, how CO2 reduction is achieved in practice is up to each index provider. Therefore, according to Snijders, pension funds that opt for a climate benchmark would do well to compare the returns of their investments with a standard benchmark without exclusions, such as the MSCI World Index.

In recent years, Pensioenfonds SNS Reaal has benchmarked its own portfolio against such a ‘grey’ benchmark, the MSCI Developed Markets Index, for performance comparisons. The reason for this was that the pension fund primarily invests passively, explains Benno Honsdrecht, chairman of the investment committee. Last year, however, the standard benchmark which includes oil and gas stocks significantly outperformed the SNS Reaal portfolio, which is based on the fund’s own ESG policy.

“It was the first time this happened,” Honsdrecht said. “Therefore we realised that to be better able to compare fund managers, we should also have a green benchmark.” The pension fund is yet to decide which green benchmark to use.

Flexibility needed

When introducing a new investment policy last year, Pensioenfonds Ahold Delhaize, the €5.1bn scheme of the Netherlands’ largest supermarket chain, chose to reduce the CO2 emissions of its investments in line with the climate transition benchmark, but not to adjust the benchmark it uses. For now, the fund will continue to benchmark its investments against standard MSCI indices.

Eric Huizing, responsible for the investment policy of the fund, said: “We share Cardano’s message to be cautious about rigorously adjusting the benchmark. Given the continuous developments related to climate and indexing, flexibility is needed.

“Moreover, our preference is to realize CO2 reductions in the real economy, with the companies themselves, rather than reducing the CO2 footprint through portfolio adjustments.”

Next year, however, the fund will investigate whether to introduce one or more sustainable benchmarks.

The ING and UWV pension funds both use benchmarks tailored to the Paris Agreement.

ING said that in addition to CO2, its investment policy also takes account of human rights, labour rights and corruption. UWV pension fund declined to respond to IPE’s questions, citing the holiday period. In its annual report, the fund states that it pursues a best-in-class policy within the equity portfolio based on ESG ratings.

Although many pension funds that use a PAB say they also take into account other ESG factors in addition to CO2 emissions, Snijders has noted that many investment consultants and pension funds specifically request index funds with a low tracking error to the PAB. “If funds decide to implement such a solution, there is no additional room for a specific ESG policy,” he said.

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